Retirement Confidence Is Increasing – But Should It Be?

Is the rising stock market giving workers confidence that they will have enough money to live comfortably in their retirement years?

The 28th Annual Retirement Confidence Survey conducted by the Employee Benefit Research Institute (EBRI) shows a slight increase in the number of respondents that are very confident or somewhat confident in their ability to have a comfortable retirement. The 2018 EBRI survey shows 64 percent of workers with retirement confidence, compared to 60 percent in 2017.

Retirees More Confident

Retirees are even more confident than workers, with 75 percent very or somewhat confident they will have enough money to live comfortably throughout their retirement years.

Employer-based defined contribution plans such as 401(k)s do seem to play a role in increased confidence, as 85 percent to 86 percent of respondents are very or somewhat satisfied with their workplace retirement plan and the available investment options.

However, this optimism doesn’t seem to be warranted based on other survey results.

Look Out, Here Comes a Reality Check

The EBRI survey shows multiple disconnects between what future retirees expect and what current retirees experience. Consider the following examples.

While the median age of retirees is 62, the median expected retirement age is 65. Only 7 percent of actual retirees managed to wait until age seventy to retire, while 30 percent expect to work to age seventy or older.

Around one in three retirees have received at least some salary to supplement retirement income, but 79 percent of current workers expect to do so.

Timing Is Flaw

The flaw is assuming total control over when and how you retire. Layoffs, health problems, and other unforeseen circumstances can force earlier retirement – and frequently do.

EBRI found that 34 percent of retirees left the workforce before age 60, yet only 10 percent of current workers plan on retiring that early.

Approximately two-thirds of retirees rely on Social Security as a major source of income, but only one-third of current workers expect Social Security to be a major source of their income in retirement.

Conversely, over half (53 percent) of today’s workers expect to rely on 401(k)s and similar workplace retirement programs, while less than one-quarter (24 percent) of retirees report them as a major source of income.

The disconnect may be partially explained by the expansion of defined contribution programs as traditional pensions (defined benefit programs) are phased out – but there’s still a dangerous mismatch between retirement reality and expectations.

At Least We’re Consistent

The 2018 EBRI survey is the 28th annual survey. While numbers change from year to year, the EBRI survey has shown one constant since 1991 – collective unwarranted optimism about retirement.

The number of respondents who are either very or somewhat confident in a comfortable retirement generally fluctuates between 60% and 80%, despite levels of saving and unpreparedness that undercut those conclusions. As expected, EBRI makes similar observations throughout the years.

From the 1996 EBRI survey brief – “Three-of-four retirees never even tried to figure out how much money they would need before they retired.”

Full of Holes

From the 2006 EBRI study brief – “…many Americans’ retirement expectations are like a piece of Swiss cheese – full of holes.”

From the 2008 ERBI survey, “…thirty-three percent of workers who have not saved for retirement nonetheless feel very or somewhat confident that they will have a comfortable retirement.”

From the 2018 survey – only 46% of respondents have thought about how they’ll occupy their time in retirement.

Underprepared

Only 57 percent of workers age 55 or above have as much as $100,000 in savings – far less than they are likely to need, with little time to catch up. Only 38 percent of workers have reviewed their expected Social Security benefits at retirement age.

If you haven’t thought about retirement costs or bothered to check your likely retirement income, you have little reason to be confident in a comfortable retirement.

A hundred thousand dollars sounds like a lot of money but try to live on it for twenty to thirty years with only Social Security benefits to supplement your spending.

What It Means

Perhaps the EBRI survey reflects the unflappable American spirit that tells us things will work out somehow even when the future looks grim.

Perhaps it reflects our American tendency to gloss over unpleasant facts and plunge ahead without plans.

It’s nice to have confidence in a comfortable retirement. It’s much better if that confidence is based on a thoughtful set of retirement goals and concrete financial plans grounded on those goals.

The Takeaway

If you really want a comfortable retirement, don’t leave it to chance. Outline your retirement goals, estimate how much those goals will cost, estimate your income from Social Security or any other sources, and set up a retirement savings plan that allows you to fill the financial gap and meet your retirement goals.

Be sure to pad your expected expenses for unforeseen circumstances, such as medical costs. Fidelity estimates that a healthy 65-year-old couple will spend around $280,000 on out-of-pocket medical expenses over the remainder of their lifetimes.

Your plans may change in retirement. Many people have idealized dreams of retirement and find reality to be a rude shock.

Plans Change

Others deal with unexpected life changes or medical issues that alter their plans. If you have a solid financial retirement plan, you’re more likely to be able to withstand those changes and still have a comfortable retirement.

Change your plans during retirement if necessary – but have the financial backing to absorb setbacks, and make other changes because you want to, not because you have to.

Regardless of where you plan to retire, the number one factor in ensuring that you can retire on your terms is your 401(k).